agricultural marketing service controls over pork … · this evaluation was scheduled as part of...

AGRICULTURAL MARKETING SERVICECONTROLS OVER PORK CHECKOFF FUNDS

WASHINGTON, D.C.EVALUATION REPORT NO. 01801-1-KC

MARCH 1999

UNITED STATES DEPARTMENT OF AGRICULTUREOFFICE OF INSPECTOR GENERAL - AUDIT

GREAT PLAINS REGIONP. O. BOX 293

KANSAS CITY, MISSOURI 64141

UNITED STATES DEPARTMENT OF AGRICULTURE

OFFICE OF INSPECTOR GENERAL

Washington D.C. 20250

DATE: March 31, 1999

REPLY TOATTN OF: 01801-1-KC

SUBJECT: Controls Over Pork Checkoff Funds

TO: Enrique FigueroaAdministratorAgricultural Marketing Service

ATTN: David LewisDirectorCompliance Staff

This report presents the results of our evaluation of the National PorkBoard’s (Board) controls over pork checkoff funds. Although our evaluationdid not disclose material misuse of checkoff funds, it showed the Board needsto improve accountability for the funds and regain control over the NationalPork Producers Association’s (NPPC) influence on the Board’s business. Weidentified significant weaknesses in the Board’s management controls overcheckoff funded NPPC subcontracts and cost accounting practices. We alsofound that the Board did not perform effective compliance testing at checkofffund collection sites or during State association reviews. In addition, theBoard did not ensure that pork producers are afforded a complete and equalaccess to national pork delegate elections.

Your March 9, 1999, written comments on the draft report are included asexhibit C, with excerpts and the Office of Inspector General’s (OIG) positionincorporated into relevant sections of the report. Your response providedsufficient information to reach a management decision on all findings andrecommendations of the evaluation. Please follow your internal agencyprocedures and provide final action documentation to the Office of the ChiefFinancial Officer.

We appreciated the courtesies and cooperation extended to us by members ofyour staff, the National Pork Board, and the National Pork Producers Council.

JAMES R. EBBITTAssistant Inspector General

for Audit

This evaluation was scheduled as part of

EXECUTIVE SUMMARY

CONTROLS OVER PORK CHECKOFF FUNDSAUDIT NO. 01801-0001-KC

PURPOSE the Office of Inspector General’s annualplan and requested by AgriculturalMarketing Service (AMS) officials. Ouroverall objective was to determine if the

National Pork Board (Board) and AMS applied effective controls toensure pork checkoff funds were collected, distributed, and expendedin accordance with the Pork Promotion, Research and ConsumerInformation Act of 1985 (Act).

The Board was established by the Act to promote the pork industrythrough research and advertising. The Board is empowered to financeits activities by collecting assessments, called "checkoff funds,"from all pork producers, based on the volume of their production.In 1997, the Board collected $60 million in checkoff funds.

Our evaluation showed that the Board

RESULTS IN BRIEF basically used checkoff funds to financepork promotion, research, and consumereducation projects which generallybenefited the pork industry, including

small and disadvantaged producers. Our evaluation did not disclosematerial misuse or loss of checkoff funds, but it did find the Boardhas relinquished too much authority to its primary contractor, theNational Pork Producers Council (NPPC), and has placed the NPPC ina position to exert undue influence over Board budgets and grantproposals. The Board has awarded all program grants to the NPPCsince 1996.

The Board itself has not hired sufficient staff to administer andprovide adequate oversight of the checkoff program. The Boardemploys only two persons (an Executive Vice President and anassistant), to oversee $60 million in annual checkoff collections,distribution, and use. The Board’s degree of dependence on the NPPCto administer subcontracts and carry out much of the Board’s workresulted in a weakened accountability over contributed funds.

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- Projects were begun without contracts or without appropriatesignatures on contracts. NPPC agreed to ignore USDA contractrequirements for veterans preferences, etc., when vendorsobjected to them.

- The Board did not require NPPC to implement accounting andmanagement information systems to track and report on thecheckoff funds expended for each project and subcontract.

- The Board was not involved in NPPC activities for subcontractorselections, setting contract terms, and accepting deliverables.

- The NPPC did not develop adequate written policies and proceduresfor administering checkoff-funded projects and subcontracts.

The absence of appropriate oversight by the Board resulted insubcontractors working without contracts, a $900,000 unsecuredprepayment to a subcontractor, varying and subjective rates forcommon contracting costs, nondisclosure of potential conflicts ofinterest, and noncompliance with USDA and NPPC’s own requirements.

We also established that the Board’s lack of oversight also had anegative impact on assuring accountability of funds for otheractivities. We found that neither the Board nor AMS tested NPPC’sfixed cost allocations to determine if the allocations were fairlyapplied to checkoff activities. The Board also did not effectivelytest compliance at checkoff collection sites or at State porkassociations. State associations receive and expend about $10.5million in national checkoff funds each year.

In addition, the Board did not provide State pork associationssufficient guidance on their national election practices. Stateassociations restricted producer access to Board national delegateelections. As a result, the elections in some States werevulnerable to manipulation because all producers were not providedequal opportunity to participate.

We recommended AMS work with the Board

KEY RECOMMENDATIONS and its delegates to develop a plan toaccomplish appropriate separation fromthe NPPC and assure accountability forcheckoff expenditures. The plan should

provide for sufficient staff to oversee key operationalresponsibilities for the Board. We also recommended actions for theBoard to more effectively oversee their primary contractor’ssubcontracting practices and procedures; more closely monitor andtest State association checkoff expenditures and collections andtransfer of checkoff funds from collection sites; and improve accessto Board delegate elections for all pork producers.

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We discussed our draft findings,

AGENCY POSITION conclusions, and recommendations withresponsible AMS officials on January 20,1999. The officials generally concurredwith our findings and recommendations.

However, preliminary discussions of our results with representativesof the Board and NPPC indicated that officials of both organizationsdisagreed with our conclusions concerning the working relationshipof the Board and the NPPC, as well as certain NPPC subcontractingand accounting activities (see exhibit B for the Board’s writtencomments on our preliminary results). The Board’s Executive VicePresident and NPPC’s Chief Executive Officer stated their mutualbelief that the NPPC’s close working relationship with the Board hasnot weakened the contract relationship between the two entities andthat the partnership has served the industry well by conservingpersonnel and overhead costs.

On March 9, 1999, AMS officials provided written comments on ourdraft report. The comments showed the officials generally concurredwith our findings and accepted our recommendations. The commentsalso provided sufficient information about the agency’s plannedcorrective actions to achieve a management decision on all findingsand recommendations of the evaluation (see written comments attachedas exhibit C). We incorporated relevant excerpts of the commentsinto the applicable sections of the report.

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TABLE OF CONTENTS

EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . i

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

OBJECTIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

METHODOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

FINDINGS AND RECOMMENDATIONS. . . . . . . . . . . . . . . . . . . . 4

I. ACCOUNTABILITY OF CHECKOFF FUNDS SHOULD BE IMPROVED. . . . . . . . . . 4

BOARD’S DELEGATION OF AUTHORITY WEAKENED ITS CONTROLSAND ACCOUNTABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Recommendation No. 1a . . . . . . . . . . . . . . . . . . . . . . . . . 8

Recommendation No. 1b . . . . . . . . . . . . . . . . . . . . . . . . . 9

SUBCONTRACTING PRACTICES NEED IMPROVEMENT. . . . . . . . . . . . . . . 9



Recommendation No. 2c . . . . . . . . . . . . . . . . . . . . . . . . . 16

COST ACCOUNTING REQUIREMENTS NEED STRENGTHENING. . . . . . . . . . . . 17



USDA/OIG-A/01801-1-KC Page iv

TABLE OF CONTENTS

REVIEWS OF STATE ASSOCIATIONS DID NOT TEST FORCOMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20


COLLECTION SITE REVIEWS NEED BETTER CONTROLS. . . . . . . . . . . . . . 22


II. NATIONAL PORK ELECTIONS SHOULD BE MORE INCLUSIVE. . . . . . . . . . . 24

RESTRICTED VOTING OPPORTUNITIES INHIBIT PARTICIPATION . . . . . . . . . 24



EXHIBITS

A - PROJECT ACCOUNT CLASSIFICATIONS . . . . . . . . . . . . . . . . . . 27

B - NATIONAL PORK BOARD COMMENTS ON OUR PRELIMINARY FINDINGS. . . . . . 30

C - AMS RESPONSE TO THE DRAFT REPORT. . . . . . . . . . . . . . . . . . 32

USDA/OIG-A/01801-1-KC Page v

In answer to increasing quantities of

INTRODUCTION

BACKGROUND low-cost imports of foreign produced porkand pork products, Congress enacted thePork Promotion, Research and ConsumerInformation Act of 1985 (Act). The

purpose of the Act was to provide an orderly procedure for financingand carrying out an effective and coordinated program of promotion,research, and consumer information to strengthen the position of thepork industry in the marketplace and to maintain, develop, andexpand markets for pork and pork products.

The Act established a 15-member National Pork Board (Board) toimplement the Act, with oversight by the Secretary of the U.S.Department of Agriculture (USDA). The Agricultural MarketingService (AMS), a USDA agency, fulfills the Department’s oversightresponsibilities through its Livestock and Seed Division. The Boardemploys two full-time employees to administer the collection,distribution, and use of the checkoff funds.

The Board began operating in 1986. Board members are nominated bypork producers (through the Pork Act Delegate Body) and shallconsist of producers representing at least 12 States and importersappointed by the Secretary. Members may serve up to two consecutive3-year terms and are not compensated for their service.

The Act also established an assessment to finance the Board’spromotion, research, and consumer information activities. Theassessments, commonly referred to as "checkoff," are collected fromall importers and pork producers based upon the value of theirimports and/or production. The assessments began in 1986 and havegrown in value in recent years. The current assessment rate is.0045, or 45 cents per $100 of the market price. Assessmentstotaled about $41 million in 1995, but a recent increase in the rateraised about $58 million in 1996 and $60 million in 1997. TheBoard’s 1998 budget provided for about $56 million in revenues.

The Act acknowledged an existing nonprofit organization, theNational Pork Producers Council (NPPC), as a venue for facilitatingimplementation of the Act. Thus, Congress authorized temporarydisbursement of checkoff funds directly to the NPPC in 1986. Withina short time, the NPPC became the Board’s primary contractor forimplementing the Act. The Board presently contracts the NPPC toprovide working space; routine personnel, administrative, andaccounting services; and the technical and professional applicationsnecessary to implement requirements of the Act. The NPPC employed98 employees at the time of our evaluation, to take care of NPPC

USDA/OIG-A/01801-1-KC Page 1

business, to provide services to the Board, and to administerprojects for the Board’s eight industry program areas. The areasinclude (1) Consumer Advertising, (2) Retail Merchandising, (3) PorkInformation, (4) Foodservice Promotion, (5) Foreign MarketDevelopment/World Trade, (6) Production Technology and Information,(7) New Products Development, and (8) Swine Health/Pork Quality/PorkSafety.

At the time of our evaluation, the pork industry, including theBoard and the NPPC, was involved in public discussion on the stateof the pork industry, including the impact of large, commercial hogconfinement operations on small farmers and the environment. Anumber of pork producers and civil activist groups were also in theprocess of gathering signatures for a referendum on pork checkoffassessments and related issues. Our evaluation was planned andconducted to facilitate USDA’s oversight responsibilities and wasnot performed to hinder or promote any opinions expressed in thesepublic discussions or related proposals for a referendum.

The objective of our evaluation was to

OBJECTIVES determine if the Board and AMS appliedeffective control systems to ensure thatpork checkoff funds are collected,distributed, and expended in accordance

with applicable laws and regulations.

We performed our fieldwork at AMS

SCOPE offices in Washington, D.C., and at theco-located offices of the Board and theNPPC in Clive, Iowa. Our evaluationgenerally covered the Board and the NPPC

expenditures and operations funded with checkoff dollars during 1997and 1998, but included components of 1996 activities when warranted.

Specific matters reviewed included checkoff funded operations of theBoard and the NPPC; controls over checkoff collections; distributionof checkoff funds to State associations; checkoff funded agreements,contracts, and subcontracts; Board and/or NPPC committees; oversightand compliance activities; and delegate body elections. We reliedon audits conducted by an international certified public accountingfirm on the Board’s and the NPPC’s financial statements for issuesconcerning financial operations.

Our evaluation was conducted in accordance with the QualityStandards for Inspections of the President’s Council on Integrityand Efficiency.

To accomplish our objectives, we

METHODOLOGY performed a survey to identify issues andareas vulnerable to noncompliance withthe Act. Based on the results of thesurvey, we developed and performed tests

of program records, contracts, and subcontracts, as well as


financial and election documentation. We interviewed and obtainedregulatory information from responsible AMS program officials. Wealso obtained the officials’ comments and concerns on theadministration of the Act.

Our evaluation included interviews with the Board’s Executive VicePresident; the NPPC’s Chief Executive Officer (CEO) and other NPPCofficials, staff, and subcontractors; and the certified publicaccountant engaged by the Board and the NPPC to perform periodicfinancial statement audits.

We visited the Iowa Pork Producers Association and reviewed theobjectives of the association’s 1997 checkoff funded projects. Wealso interviewed officials at five State pork producer associationsto obtain information about their nomination practices andprocedures, voting participation levels and accessibility foreligible producers. The five associations were judgmentally selectedbased on the amount of checkoff receipts distributed to each Statein 1997.

We interviewed 36 producers to verify collection information andobtain their comments about the pork checkoff program. We alsointerviewed representatives and members of three civil activistgroups which publicly voiced concerns about pork checkoff issues.

We reviewed the agreements between the Board and the NPPC, as wellas subcontracts awarded by the NPPC for pork checkoff fundedprojects and activities. We could not establish the total number ordollar value of all subcontracts active during the period of ourevaluation (see Finding Nos. 2 and 3). We judgmentally selectedthree vendors with 1997 NPPC subcontracts for detailed review, oneof which did not have an active contract at the time of our review.The review included evaluation of the documentation and othersupport for all related checkoff disbursements, as well as tests todetermine the adequacy of controls in place to prevent and detectwaste, loss, and misuse of checkoff funds. All three vendors wereselected primarily because NPPC documents indicated funds disbursedto the vendors exceeded the contracted amounts. Two of the vendorswere also selected because the contracted deliverables includedpersonal or consulting services. The third was selected because thevendor received over $1 million under the contract. We alsoreviewed the files of 51 subcontracts with budgets that exceeded$25,000 and were active during 1998.


The Board has not assured an appropriate level of accountability for

FINDINGS AND RECOMMENDATIONS

I. ACCOUNTABILITY OF CHECKOFF FUNDS SHOULD BE IMPROVED

pork checkoff funds. Although we found no evidence that the Boardor the primary contractor misused checkoff funds, we believe theBoard should retain more direct control over program operations andfunds in order to comply with the Act. Several factors weakened theBoard’s control over its operations and funds, including:

* A scarcity of Board staff to administer the program and tooversee operations delegated to the Board’s primary contractor;

* the relationship between the Board and its primary contractor,including annual contract and service agreement renewals;

* the primary contractor’s inappropriate contracting and costaccounting practices; and

* ineffective compliance reviews at collection sites and for Stateassociations’ use of checkoff funds.

The Board delegated too much authority to

FINDING NO. 1

BOARD’S DELEGATION OFAUTHORITY WEAKENED

ITS CONTROLS ANDACCOUNTABILITY

its primary contractor, the NPPC, withoutestablishing effective control systems toassure accountability of its contributedfunds. The Board was not sufficientlystaffed to administer the program, and itperpetually renewed its contract with theNPPC to carry out much of the Board’swork without instituting adequatereporting systems and oversight. In ouropinion, the Board’s relationship withthe NPPC and its degree of dependence onit have subjected checkoff funds to a

level of NPPC influence that is unnecessary and inappropriate. Webelieve through the Board’s reliance on the NPPC, the Board hasrelinquished the responsibilities and authorities it was given underthe Act.

The Conference Report for "The Food, Agriculture, Conservation, andTrade Act of 1990" (October 22, 1990), includes provisions whichprohibit commodity boards from allowing other organizations toinfluence their decisions. Subtitle I, Section 1999S(b) of thereport states:


It is the sense of Congress that, to ensure the continued successof the federally-authorized checkoff programs, boards or councilsthat participate in the administration of the checkoff programshould take care to faithfully and diligently perform thefunctions assigned to them under the authorizing legislation* * * [E]ach currently operational checkoff board or councilshould review its charter and activities to ensure that itsresponsibilities and duties have not been inappropriatelydelegated or otherwise relinquished to another organization.

Conditions disclosed during our evaluation show the Board becamedependent upon the NPPC to such a degree that inappropriateinfluence was unavoidable and the Board relinquished keyresponsibilities to the NPPC. The details follow.

a. Staffing . The Board employs only two full-time employees, anExecutive Vice President and an assistant. These employees mustoversee the collection, distribution, and expenditure of checkofffunds totaling about $60 million annually. Section 1619(b)(1)(G) of the Act states the Board shall employ a staff andconduct routine business. The provision does not describe aminimum staff nor prohibit the use of contracted services toaccomplish the Board’s business.

In our opinion, two employees cannot be expected to fulfill allthe necessary administrative and oversight responsibilities andbe reasonably expected to maintain the level of accountabilitynecessary to ensure the integrity of checkoff funds. The effectof this weakness is compounded by the number and complexity ofissues within the eight major grant areas, the number ofcheckoff-funded projects and contracts under authority of theBoard, and the influencing factors of the NPPC.

b. Committees and Task Forces . Checkoff dollars fund committees ofboth the Board and the NPPC that are used to develop annualproposals for the Board’s eight major grant areas. Thecommittees develop detailed projects, budgets, and subprojectswithin each grant area. Although the Board makes final decisionson significant issues, the issues themselves are often formed by,or based upon, the committees’ work.

We examined the structure of 48 committees operating for theBoard and/or the NPPC in March 1998. Thirty-three of thesecommittees were funded entirely with checkoff dollars. Fifteenof these 33 were described once as separate committees for theBoard, once as separate committees for the NPPC, and once againas joint Board/NPPC committees. Another eight committeesoperated with both checkoff and NPPC non-checkoff funds. Webelieve these and other conditions show funding, structure, andassigned tasks for the committees have obscured accountabilityfor checkoff expenditures.


-- Thirteen of the 33 committees that were funded entirely withcheckoff dollars did not include a Board member. Ten of thesecommittees formulated policies for the $7.7 million checkoff"Product Improvement/Production Technology" grant of 1997.

-- Two committees that were funded entirely with non-checkoffdollars included Board members even though the committeesengaged only in NPPC business. Another three committees thatwere funded partially with checkoff dollars did not includea Board member; these three committees engaged only in NPPCbusiness.

-- One consultant served on six committees which were fundedunder the same grant as his projects. We did not establishwhether or not this consultant helped develop the workeventually awarded to him. At a minimum, this conditionpresented the appearance of a conflict of interest. Managersfrom another NPPC subcontractor also served on checkoff-funded program committees (see Finding No. 2).

Although the Board and the NPPC Board of Directors retainedapproval authorities, these committees framed the direction andpolicies eventually approved or disapproved by the respectiveboards. We concluded that neither organization was independentof the other because Board members were not represented oncommittees used to develop the direction of checkoff-fundedgrants, but were included in NPPC committees which dealt withnon-checkoff-funded issues.

c. NPPC Influence on the Board’s Budget . The Board’s budget wasdeveloped with assistance from the NPPC Board of Directors andthe NPPC Budget Committee. These NPPC officers participated inprioritizing and placing projects in specific grant areas. Thisparticipation was also based upon a preliminary budget that wasdeveloped for the Board by an NPPC economist.

d. NPPC Technical and Administrative Assistance for Developing GrantProposals, Projects, and Subprojects . NPPC staff providedtechnical and administrative assistance during development ofannual proposals for the eight grant areas. NPPC staff draftedand presented preliminary checkoff-funded grant allocations toboth the Board’s and the NPPC’s budget committees. This meansthat NPPC employees and officers were in a position to influencethe content of the annual contract proposals for the grants.

The Board administered the grants and projects throughparticipation in selected committees and through limitedoversight provided by the Board’s Executive Vice President.While participation in the committees by Board members providedsome control over the budgets for planned projects, Board membersdid not review or reconcile actual project expenditures to thecorresponding budgeted amounts (see Finding No.3) to ensureprojects were maintained and completed in accordance with theirrespective project budgets.


e. NPPC Awarded All Eight Grant Areas . The Board has awarded allprogram grants to the NPPC since 1996. In prior years, two ofthe eight grants were awarded to a subgroup of the now defunctNational Livestock Meat Board. The annual grant awards to theNPPC provides NPPC opportunities to influence informationprovided to the Board and other potential bidders before thegrants are advertised for bid. We found that NPPC staffparticipated in planning and developing the methodologiesapproved by the Board to conduct and complete checkoff projectsand subprojects. This arrangement provided advance notice to theNPPC on the details for each proposal. NPPC staff were also ininfluential positions within the Board’s decision-makingprocesses as staff consultants for committees. In our opinion,these factors make it unlikely the Board could or would award anygrants to another entity.

f. NPPC Administrative and Accounting Services and Support . Eachyear, the Board awarded a contract to the NPPC to provideadministrative and accounting services. NPPC staff performedalmost all the Board’s administrative and accounting functions,including accounting for salaries, travel, receipts,distributions to State associations, and disbursement of fundsfor all of the Board’s promotional, educational, and researchprojects. NPPC employs a Chief Financial Officer (CFO), acomptroller, a seven person accounting staff, and a personnelmanager. The Board relied on the NPPC accounting staff and didnot employ a financial manager, an accountant, or a personnelspecialist. As a result, the NPPC accomplished all the Board’sroutine administrative and accounting responsibilities withoutsufficient oversight or validation by the Board.

g. Credit for Board Projects . Publications and literature producedby the NPPC for the Board’s checkoff-funded projects werepromoted as NPPC products, rather than products of the Board.The standard credit line on such products is: "National PorkProducers Council in cooperation with the National Pork Board."In this way, the Board’s contractor, the NPPC, claims primarycredit for projects developed and funded by the Board withcontributions from pork producers and importers. We believe thestatement implies that the authorship of projects and theownership of project materials originated with the NPPC ratherthan the Board, and does not acknowledge the contributions ofproducers and importers. In our opinion, the statement is anindicator of how the NPPC and the Board perceive the actualrelationship between the Board, the NPPC, and checkoffcontributors.

h. Co-location with the NPPC . The Board’s offices are located in abuilding owned and occupied by the NPPC. The Board pays rent tothe NPPC and shares common facilities, such as meeting rooms,kitchen, library, receptionist, telephone system, and otherequipment. The Board may be reached through the internet, butonly through the NPPC domain at "nppc.org," which incidentally ismaintained with checkoff dollars provided through the Board. The


co-location of headquarter offices of the Board and the NPPC maynot be a significant factor in the Board’s independence, but itpromotes the perception of the Board’s dependence on the NPPC.

The Board’s Executive Vice President and NPPC officials vigorouslydefended the current structure of the Board and its relationshipwith the NPPC. Both organizations offered persuasive arguments todefend the individual factors we noted, as efficient and effectiveadministration of the checkoff program. However, when thecombination of factors is viewed as a whole, and in combination withFinding Nos. 2 (contracts) and 3 (cost accounting), these conditionsshow a Board that does not operate independently and without undueinfluence from the NPPC.

The Board and the NPPC should remember that while all pork producersare obligated to contribute pork checkoff dollars, they may notagree with the NPPC’s priorities. Some producers are, in fact,opposed to the NPPC itself. To comply with the Act and protect theintegrity of the checkoff program, the Board should maintain anarms-length business relationship with the NPPC. It should alsoprovide better assurance to the Department and producers thatcheckoff dollars are not used primarily to advance NPPC goals andobjectives.

RECOMMENDATION NO. 1a

AMS program officials should work withthe Board and delegates to develop and implement a plan that ensuresappropriate separation of the Board from the NPPC and assuresappropriate accountability for Board expenditures of checkoffdollars.

AMS Response

AMS’ March 9, 1999, written comments acknowledged that the Boardmust interact with its primary contractor to ensure proper oversightof NPPC’s checkoff fund expenditures and delivery of contracted workproducts and services. The agency will require the Board to takeaction by August 1, 1999, to assure (1) Board officers/employees donot involve themselves in routine NPPC business matters anddecisions or attend NPPC meetings which do not specifically involveBoard related issues, (2) identify the Board’s press releases andother public communications as being issued by the Board,(3) establish a unique internet domain and website for the Board,separate from that of the NPPC (by July 1, 1999), and (4) arrangefor an independent third party review of the Board’s present systemsand policies for maintaining accountability of checkoff funds,including recommendations for improvements. Based on the results ofthe review, AMS will work with the Board to strengthen the Board’saccountability. The review shall be completed and the resultssubmitted to AMS by September 30, 1999. Improvements made as aresult of the review shall be implemented by January 1, 2000.


In addition, AMS will require the Board to develop a clear policyfor Board member participation in NPPC committee meetings funded, atleast in part, with checkoff dollars. The policy shall be completedand submitted to AMS by August 1, 1999, and is subject to AMSapproval.

OIG Position

We agree with management’s decision for this recommendation.

RECOMMENDATION NO. 1b

AMS should instruct the Board to ensurethat all checkoff-funded publications, literature, and otherproducts properly emphasize the contributions of the nation’s porkproducers and the Board.

AMS Response

AMS will instruct the Board that it must claim credit on anycommunication, plan, project, publication, promotions,advertisements, and any other work product paid for with Boardfunds, including all credit and tag lines. AMS shall require theBoard to submit a corrective action plan for this by July 1, 1999,and implement an AMS approved plan by August 1, 1999. AMS will alsoestablish appropriate review and approval procedures.

OIG Position

We concur with management’s decision for this recommendation.

The Board delegated authority to the NPPC

FINDING NO. 2

SUBCONTRACTING PRACTICESNEED IMPROVEMENT

to administer subcontracts withoutestablishing controls to ensure thesubcontracts were in the best interest ofthe Board. Public awareness of arecently questioned NPPC subcontract ledthe AMS, the Board, and the NPPC tostrengthen controls over the NPPC’ssubcontracting practices. Nevertheless,the Board’s oversight of subcontracting

activities had not significantly improved. Specifically, the Boardcontinued to authorize the NPPC to negotiate and administersubcontracts, including vendor selection and terms of agreement,without Board involvement. As a result, the Board cannot providereasonable assurance that checkoff funds expended for NPPCsubcontracts were adequately safeguarded from misappropriation,waste, loss, and misuse.

The NPPC advertised bids, selected subcontractors, negotiated andfinalized subcontract terms, accepted deliverables (services and


products), and made final payments to subcontractors without reviewor involvement of Board members or employees. The Board’s ExecutiveVice President stated although he was not aware of all the checkoff-funded subcontracts, he and the Board members worked closely withNPPC staff to develop each project. The director did not believe itwas necessary for the Board to be involved with the NPPC’scontracting operations.

While the Board need not be involved with all subcontractingactivities, Board members have a duty to ensure the NPPC administerscheckoff-funded subcontracts in the best interest of the Board. Thefollowing circumstances illustrate significant weaknesses in currentpractices.

a. Management Information Systems are Needed to Manage MultipleSubcontracts . The Board did not require NPPC to establish atracking or reporting function to control the progress ofsubcontractors engaged to accomplish projects under each grantarea. Similarly, the NPPC did not initiate a tracking andreporting system on its own. As a result, neither organizationcould compile a list of active subcontracts and agreements fundedby the Board, nor summarize the checkoff dollars obligated toeach subcontractor.

b. Subcontracting Policies and Procedures Should be Prescribed . TheBoard relied on NPPC staff to administer checkoff-fundedsubcontracts without prescribing adequate written procedures.The procedures are necessary to help assure NPPC staff properlyimplement Board contracting requirements and policies. Althoughthe Board established written policies and procedures forcontracts awarded directly by the Board, it did not require theNPPC to apply them to subcontracts for checkoff projects.Written procedures were not available for such activities asadvertising bids for subcontracts, selecting appropriatesubcontractors, negotiating the terms of subcontracts, anddefining deliverable services and products.

The following examples are conditions we observed during theevaluation. Note the NPPC generally applied contractrestrictions required by the Department.

(1) Uniform Rates for Administrative Support Costs . The Boarddid not provide written guidance on how to reimbursesubcontractors for routine support costs or to payconsultants for nonconsulting hours. An NPPC official statedproject managers were authorized to negotiate different ratesfor routine support costs, such as travel and clericalassistance. For at least two subcontractors, this delegatedauthority increased the vulnerability of checkoff dollars toabuse.

Consultant A . The consultant obtained three subcontractsfrom the NPPC, none of which included provisions to reimbursethe consultant for rental car costs. The project manager


verbally authorized the subcontractor to rent cars and bereimbursed for the expense, even though other consultantswere not approved for such expenses. The consultant and theNPPC project manager acknowledged the consultant used therental cars for personal reasons. They stated the consultantrequired NPPC to provide rental cars as a precondition toperforming the contracted services. The consultant requireda car as means for a quick return to his residence, due tofamily concerns.

Consultant B . The subcontract for consultant B, a chef,authorized payment of $100 per hour for consulting services,but it did not provide for payments based on travel time ortime spent for support services. The NPPC project managerauthorized compensation for the chef at a rate of $50 perhour for travel time, even though NPPC did not generallyauthorize such compensation. The manager also authorized $50per hour payments for nonprofessional support duties, such asgrocery shopping and cleaning equipment. NPPC compensatedthe vendor without applicable contract provisions.

In our opinion, the situations involving these twoconsultants should clearly have been addressed in thevendors’ contracts, based on Board policy, rather than onsubjective criteria applied by individual project managers.

(2) Disclosure of Potential Conflicts of Interest . The Board didnot require the NPPC to obtain disclosure statements todetect potential conflicts of interest between subcontractorsand their majority investors with either the Board or theNPPC. Disclosure statements are necessary when, as in thiscase, the contractor operates in an apparently limitedenvironment of relatively few potential subcontractors.

For example, consultant A served on six program committeesserving both the Board and the NPPC. All six committeesdealt with the grant used by NPPC to fund the consultant’sprojects (see Finding No. 1). We did not find the consultantexercised influence within the committees to affect hiscontract work. However, having the contractor serve on thesame committees that developed plans and budgets for hisprojects gave the appearance of a conflict of interest.

In a second example, subcontractor C received an advancepayment of $900,000 without providing collateral orpreliminary services to secure the amount. The NPPC did notrequire the vendor to submit a disclosure statement (see item(3) below) to ensure the vendor did not have a conflict ofinterest with any of the NPPC officials involved with thecontract terms. We obtained and reviewed financialinformation on the contractor and did not find any apparentconflicts of interest.


NPPC officials and the Board’s Executive Vice President didnot agree that conflict of interest certifications werenecessary. We believe written disclosures of potentialconflicts of interest are essential because many NPPCsubcontracts deal with research that can be performed byorganizations with close personal or business relations withNPPC and Board officials. The Board, NPPC, and manysubcontractors were all located in Iowa, increasing thepotential for business relationships between them.

(3) Unsecured Advanced Payments . The Board’s Executive VicePresident did not prohibit the NPPC from making advancepayments to subcontractors without adequate security or theBoard’s expressed approval. We found the NPPC prepaidsubcontractor C $900,000 of a $1 million subcontract withoutcollateral or other security. NPPC officials conferred withthe Board’s Executive Vice President before the advancepayment was made. In our opinion, this transactionunnecessarily put $900,000 in checkoff funds at risk fromloss or unauthorized use. In the absence of adequatesecurity, the transaction demonstrated questionablecontracting practices and poor cash management.

Subcontractor C also received an additional $300,000 for theproject without an addendum to the contract; that is, thetotal cost of the services provided was $1.3 million on acontract budgeted and approved for $1 million. NPPC staffauthorized the additional expenditures under purchase order,rather than contract addendum. NPPC disbursed two payments,totaling $300,000, after revised contracting proceduresprohibited the practice. An NPPC official stated thatproceeds from sale of the animals at project completion mayoffset these additional expenses.

c. Written Contracts . The Board and the NPPC, with AMS concurrence,established a policy that written subcontracts were not requiredfor any products and services valued at $25,000 or less. Weidentified three NPPC vendors without written contracts whoprovided more than $25,000 in services for checkoff-fundedprojects. Moreover, we question the value of imposing anarbitrary dollar limit for requiring written subcontracts. Thepolicy was established and violated largely because the NPPC hadnot implemented adequate controls to ensure written subcontractswere properly developed before work was started. Also, the Boarddid not exercise sufficient oversight of subcontracts and similarmedia used to obligate checkoff dollars.

We believe it is reasonable for producers to expect writtencontracts for all but the smallest expenditures of checkofffunds. Checkoff funds are not the same as operating cash earnedthrough normal business transactions. They are contributionscollected from producers through assessments based on production.Some contributions are clearly not voluntary; that is, someproducers are vocal in their objections to pork assessments. As


a result, the Board and the NPPC should operate very cautiouslyto preserve both the appearance and the fact of protectingcheckoff funds.

The Board could generate "boiler plate" contracts usinginexpensive software combined with the advice of qualified legalcounsel. "Boiler plate" contracts could include all requiredelements of a contract and leave key spaces blank. The contractscan then be tailored to particular tasks by filling in the blankswith such information as the vendor’s name, type of service orproduct, cost, and timeframes for completion. This is aneffective and inexpensive method to ensure that checkoff dollarsreceive at least the minimum expected value for cost.

We found four irregularities that arose because of the absence ofproper contract controls.

(1) Consultant A . The NPPC paid this consultant $59,000 for workthat was never put under contract. The consultant, auniversity associate professor, performed a technical studyand produced a written report. The Board approved theproject, budgeted for $150,000, in 1996. The NPPC did notadvertise this project for bid. Instead, the project managerawarded the work to the consultant because the managerbelieved the consultant was well qualified for the work onthe basis of other services performed for NPPC by theconsultant.

The manager and consultant agreed to terminate the projectbefore the project’s approved objectives were accomplished.Both parties agreed the results of the first phases indicatedthe project could not be completed as planned. Theconsultant stated a revised project proposal was currentlyunder development, but the revised subcontract would not beawarded to him.

(2) Consultant B . NPPC used the services of a particular chefbeginning in 1996. At the time of our review, the chef hadreceived about $81,690 for services and expenses. Only aboutone quarter of the total amount disbursed to the chef, orabout $21,188, was covered by a written contract in force foronly 8 months.

The NPPC began using the chef in September 1996 without acontract. In 1996, the chef received $16,500 for services,plus about $1,400 for expenses. NPPC continued to use thechef throughout 1997 and disbursed about $25,654 for thechef’s services for the first 4 months of the year. On May 2,1997, the project manager and the chef signed a contractcovering the rest of the year. Under the contract, the chefreceived a total of about $21,098. However, the chefcontinued to provide services to the NPPC after the contractexpired and without a written extension or continuation. Atthe time our fieldwork was completed, the NPPC had paid the


chef about $16,990 for 1998 services without a writtencontract

NPPC’s Chief Financial Officer (CFO) stated a 1998 contractwas not necessary because the project manager did not expectto use the consultant beyond the $25,000 limit. However, itwas clear the project manager intended to continue to use thechef’s services. We believe a prudent manager shouldrecognize the potential use of the contractor in 1998 andeither extend the 1997 contract or prepare a new one for1998.

(3) Vendor D . In 1998, the NPPC commissioned and paid thisvendor $25,000 for promotional services without a writtencontract in effect during the performance period. NPPC’sproject documentation included a contract which showed thevendor was required to provide the needed services during a6-week period between March 20, and May 20, 1998, but thecontract was not signed until July 14, 1998. The contractwas also not signed by an authorized contracting official.

(4) Vendor E . The NPPC contracting officer made a writtenagreement with a USDA agency on June 22, 1998. The expectedcheckoff-funded costs of the agency’s services were budgetedfor just under $39,000. However, the signed contract statedthe agency’s services were to begin on April 1, 1998, over 2months prior to the date of the agreement.

d. USDA Requirements . The NPPC awarded at least three 1998subcontracts without requiring the contractors to adhere to USDArequirements. Part 4 of the 1998 agreement between the Board andthe NPPC shows the NPPC agreed to obtain certifications from allsubcontractors on equal employment opportunities, affirmativeaction, and veterans’ preference provisions. NPPC also agreed itwould enforce these terms, including corrective action fornoncompliance.

(1) The NPPC awarded a subcontract to a grocer (vendor F) who didnot wish to be encumbered with USDA contract requirements.NPPC officials agreed with the vendor’s objections andawarded a $50,400 subcontract without consulting the Board orAMS. Even though the project manager and NPPC officialsbelieved the vendor may have a valid objection, the NPPCshould not have authority to determine which requirements areto be followed and which are not.

(2) The NPPC awarded two subcontracts to vendors G and H, withoutrequiring the subcontractors to certify they would apply non-discriminatory business practices. The two subcontracts werevalued at a total of about $90,000.

e. NPPC Requirements . NPPC officials revised the organization’ssubcontracting practices in 1997, in response to an AMS report onone NPPC contract. To test the effectiveness of the new


procedures, we conducted a limited review of the 51 subcontractslisted by the NPPC as active in July 1998. Our examinationincluded only selected elements of subcontracts funded withcheckoff dollars.

We determined that 15 of the 51 active subcontracts were notsigned by the designated NPPC officials. The total value of the15 subcontracts was about $667,000. The revised NPPC guidelinesrequired subcontracts valued at over $25,000 to be signed byeither the NPPC contracting officer or the CEO. Two of the 15subcontracts were not signed by any NPPC official, and theremaining 13 (including those for vendors D, E, G, H, and I) weresigned by managers who were no longer authorized to sign due tothe changes in procedure.

We also found an addendum to a contract was unsigned. Thesubcontract, with vendor I, was amended to change the agreed-tobilling terms. Although the original subcontract was signed bythe CEO, the addendum was not signed by either the vendor or anNPPC official. The contract covered $150,000 in checkoff projectwork and was likely to be unenforceable because the changes werenot approved by an authorized NPPC official.

Finally, we found NPPC awarded three subcontracts, including acontract awarded to vendor H, that did not include timeframes orcompletion dates for the delivery of the contracted services. Thetotal value of the three subcontracts exceeded $121,000. Inaddition to common contracting requirements, NPPC guidelinesalso required contracts to include the expected timeframes forcompletion of the contracted services.


Require the Board to develop andimplement sufficient oversight of the primary contractor’ssubcontracting practices and procedures. At a minimum, theprocedures should include the establishment of an effective andaccurate contract reporting system, and written policies andprocedures for subcontracting operations funded by the Board.

AMS Response

AMS will require the Board to prepare written policies, procedures,and guidelines, governing the Board’s review and approval ofsubcontracts entered into by its primary contractor. This shouldinclude (1) procedures for contractor reporting on contracts andagreements to the Board; (2) providing the Board with progressreports; and (3) developing a method for monitoring contractorcompliance with the Board’s written policies, procedures, andensuring accountability for all checkoff funds. The Board mustsubmit its plan to AMS for these policies, procedures, and


guidelines by September 1, 1999, and implement them by January 1,2000.

OIG Position



Direct the Board to employ sufficientstaff to ensure the primary contractor implements applicablepractices, policies, and procedures, independent of the NPPC andother potential contractors. The staff should review and approve allsignificant subcontracts, considering the content, objectives, cost,and sensitivity of the affected contract proposal.

AMS Response

AMS will require the Board to develop a proposal for adequatelystaffing the Board to monitor and audit contracts and subcontractsto ensure proper administration of all checkoff funded activitiesand projects and compliance with the Board’s policies andprocedures. As an alternative, the Board may contract anindependent firm to provide the necessary services in lieu ofadditional Board staff. The Board’s response for thisrecommendation must also be consistent with AMS’ response toRecommendation No. 2a. The Board’s plan must be submitted byOctober 1, 1999, and implemented by January 1, 2000.

OIG Position


RECOMMENDATION NO. 2c

Instruct the Board to require contractorsto prepare written subcontracts or agreements with all third partieswhen products and/or services are to be obtained with checkofffunds. This may be accomplished with automated or pro formacontracts or other economical means to properly protect the Boardand checkoff dollars.

AMS Response

AMS will instruct the Board to require its contractor(s) to issuewritten subcontracts and agreements with all third parties forcheckoff funded products and services and the conditions under whicheach document is to be used. The Board must submit the planned


procedures to AMS for approval by September 1, 1999, and implementthem by January 1, 2000.

OIG Position


The NPPC’s cost accounting practices for

FINDING NO. 3

COST ACCOUNTINGREQUIREMENTS NEED

STRENGTHENING

checkoff-funded activities and indirectcost allocations did not provide enoughdetails to ensure proper administrationof checkoff funds. Neither the Board northe NPPC staff reconciled expendituresfor checkoff projects and subcontracts tothe approved budgets for each project.Instead, the Board monitored summaries ofexpenditures which did not disclose thecosts attributable to each project andobscured potentially inappropriate

expenditures. In addition, the Board did not validate NPPC’s methodfor allocating the checkoff share for fixed costs. These conditionsoccurred because the Board did not require its primary contractor todevelop an accounting system which provided a unique accountingnumber or code for each project and subcontract and because NPPC’sindirect cost allocation method was unnecessarily complex. As aresult, the Board did not identify or properly control costs chargedto each project and could not provide reasonable assurance thatindirect cost allocations charged to the Board were appropriate.

Part 3, Section II, paragraph A, of the Board’s 1997 and 1998agreements with the NPPC required NPPC to maintain adequate recordsitemizing receipt and expenditure of all Board funds. It is also afundamental responsibility of management to ensure accountingrecords properly record each transaction so project costs can becontinuously monitored. Such controls are necessary to assuremanagement that costs are maintained within approved budgets andfunds are not made available for other uses without the Board’sauthorization. Similarly, indirect cost allocations should becalculated on a less complex and uniform basis which can be readilyidentified and understood by those responsible for safeguardingcheckoff funds.

a. Project and Subcontract Accounting Codes and Classifications .The Board authorized NPPC to track expenditures by grant area andselected projects, rather than by individual projects andsubcontracts. The Board permitted NPPC to provide only summaryreports on the progress and costs of the grant areas and majorprojects. This allowed project managers to redirect checkofffunds, which were not expended as planned, to other uses withinthe same classification code. As a result, the Board could noteffectively monitor and control actual project costs.


We examined records for six NPPC checkoff project accounts andfound that each account recorded transactions from as many as sixdifferent subprojects. The trial balances for the six accountstotaled about $1.5 million. The Executive Vice President andNPPC program manager stated the subprojects were interrelated.However, we concluded the subprojects were not always related(see Exhibit A for details).

We believe the following examples show how NPPC’s cost accountingpractices lead to inadequate control and potential misuse ofcheckoff funds.

-- One account was charged $73,408 for undefined supplies. Theproject manager stated "pinpointing" a project for a specificsupply expense would be difficult, requiring a reviewer to gothrough every supply invoice to identify the appropriateprojects for supplies, and even then, the review may notidentify the project. In our opinion, $73,000 is too largean amount to classify as undefined "supplies" spread overseveral projects. Although the project manager could notattribute the supply costs to specific projects after thepurchases were originally recorded, the costs should havebeen attributable to specific projects when incurred.

-- Twenty-five transactions, totaling $41,628, could not beattributed to any of the projects in the six accounts. Therewas also no additional supporting documentation to show thecosts should have been distributed to all projects in theaccount.

-- Rather than accounted as an asset of the Board, $1,105 wasexpended for furniture. We are concerned with the proprietyof purchasing furniture with checkoff funds for programprojects and accounting for it as a project expense."Expensed" furniture is vulnerable to misappropriation whenthe project is completed.

-- NPPC’s CFO stated that staff developed a subaccount numberingsystem with three additional numbers to enable projectmanagers to record transactions for each subproject; use ofthe subaccounts was at the discretion of responsiblemanagers. The managers responsible for the six summaryaccounts we reviewed chose not to use subaccount numbers.

b. Allocation of Fixed Costs . A review of the NPPC chart ofaccounts showed the NPPC charged the Board a significant amountof fixed costs. The costs varied, but were applied to everycheckoff-funded account. NPPC’s fixed costs were a mix of directsalary and indirect overhead costs; the method used to assignfixed costs appeared to be more complex than necessary. We didnot conduct a detailed analysis or evaluation to evaluate theimpact of fixed cost determinations on checkoff-funded projects.However, we noted that fixed costs ranged from less than 5


percent to over 90 percent of total costs for selected checkofffunded accounts.

The Board’s Executive Vice President and AMS program officialsstated neither the Board nor AMS verified or tested the fixedcosts charged by the NPPC. As a result, the Board could notvalidate the propriety of the costs charged to checkoff funds.The Executive Vice President and NPPC’s CFO concurred theallocation used by NPPC was unduly complex and stated thecomplexity was caused by an early AMS ruling which prevented NPPCfrom using a more direct allocation method. As a result, NPPCaccountants developed a series of calculations to distributeindirect costs without allocating them directly to individualcheckoff and non-checkoff projects.


Require the Board to establish uniqueaccount numbers for each checkoff funded project and subcontract andto ensure that all monetary transactions attributable to eachproject/subcontract are accurately and completely recorded in therevised accounts. The Board should use the restructured accounts tobetter control checkoff expenditures through improved monitoring andyearend reconciliation of actual costs to approved budgeted amounts.

AMS Response

AMS will require the Board to include this recommendation in thedevelopment and implementation of the written policies andprocedures governing the primary contractor’s issuance of contractsreferenced in the agency’s response to Recommendation No. 2a. TheBoard must submit its plan to AMS for these policies and proceduresby September 1, 1999, and implement them by January 1, 2000.

OIG Position



Review and annually validate themethodology used by the NPPC to allocate fixed costs to the Boardand checkoff funds. Ensure the approved allocation methodology issufficiently uncomplicated to be understood by Board members andprogram officials.


AMS Response

AMS will direct the Board to arrange for an independent review ofthe methodology presently used to allocate contractor overhead andother indirect costs. The Board will be required to recommend to AMSany necessary changes, based on the results of the review, in theprocess used to facilitate the Board’s annual review and validationof NPPC’s allocation of costs. This action may be accomplished inconjunction with the independent third-party review referred to inthe agency’s response to Recommendation No. 1a.

OIG Position

We concur with management’s decision for this recommendation.However, we believe that AMS program officials also have a duty toannually review the propriety of NPPC cost allocations. AMS canaccomplish this through a specifically directed review incorporatedinto the Board’s required annual financial statement audit.

State pork producer associations were

FINDING NO. 4

REVIEWS OF STATEASSOCIATIONS DID NOT TEST

FOR COMPLIANCE

not tested to determine if their checkoffexpenditures complied with the applicableprovisions of the Act. This conditiondeveloped because AMS and the Board didnot perform or require compliance reviewsto be performed at State associations.Thus, neither the Board nor AMS canprovide reasonable assurance that Stateassociations expend checkoff funds inaccordance with the Act. As a result, anaverage of about $10.5 million checkoff

funds distributed to State associations each year ($31.6 millionfrom 1995 through 1997) are vulnerable to waste, loss, and misuse.

The Act requires checkoff funds distributed to State associations beexpended to finance pork promotion, research, and consumerinformation plans and projects, plus administrative expenses. TheAct did not include provisions requiring the Board to conductcompliance reviews. Compliance tests are necessary to ensure theAct is implemented as intended.

The Board required State associations to submit documentationannually to show how they planned to use checkoff funds during theyear. The Board also required State associations to submit copiesof reports from periodic financial reviews, the type and frequencyof which was determined by the amount of checkoff dollarsdistributed to the association. The Board also conducted onsitereviews at up to two associations per year, but compliance testswere not incorporated into the reviews. The Board’s Executive VicePresident stated the reviews focused on educating State associationson the proper use of checkoff funds, without determining if theassociations actually complied. He added the Act did not requirethe Board to perform compliance reviews.


Our analysis of State association reviews verified the following.

-- Education and cooperation appeared to be the primary focus of theBoard’s State association reviews.

-- The Board did not use the amount of checkoff funds collected fromState producers or expended by each State association as criteriafor recent selections of associations for review. Based upon theBoard’s 1997 statistics, 6 of 10 States which received more than$300,000 in distributed checkoff funds have not been reviewedsince the Board initiated the review process in 1990. Inaddition, State associations for 2 of the 10 largest porkproducing States have never been reviewed, including NorthCarolina, the State with the second most checkoff funds collectedand expended.

-- NPPC employees conducted the reviews rather than a Board employeeor independent contractor. This practice is questionable becauseof a potential conflict of interest between the NPPC and Stateassociations. Many State associations are members of the NPPCand may share support of the NPPC’s work. In our opinion, itwould be more prudent for the Board to employ or contractqualified persons who are independent of the NPPC to conduct suchreviews.


Instruct the Board to more closelymonitor State association expenditures of checkoff funds andperiodically conduct compliance tests of them. This should includeinstructions for developing procedures to objectively select Stateassociations for review and minimum requirements for planning,conducting, documenting, and reporting the results of reviews.

AMS Response

AMS will require the Board to revise its policy for reviewing StatePork Producer Associations by (1) determining the number ofassociations that shall be reviewed annually in order to ensure allassociations are audited every 5 years; (2) developing anddocumenting uniform compliance tests to verify compliance withapplicable laws, regulations, and policies; (3) conductingcompliance reviews using Board personnel or independent, qualifiedpersonnel contracted by the Board; (4) reporting the results ofreviews within 45 days, including corrective actions planned ortaken as a result of each review; and (5) providing advance noticeof scheduled reviews to AMS to facilitate potential accompaniment byagency personnel. The Board is to submit the State associationreview policy to AMS by November 30, 1999, and implement the plan byJanuary 1, 2000.


OIG Position


The Board did not effectively perform or

FINDING NO. 5

COLLECTION SITE REVIEWSNEED BETTER CONTROLS

document compliance tests at checkoffcollection points. The Board’s writtenprocedures for these reviews were notsufficient to assure performance anddocumentation of effective and uniformlyapplied compliance tests. As a result,the Board cannot provide reasonableassurance checkoff funds were collectedin accordance with the Act.

Section 1620(a) of the Act states assessments shall be payable byeach producer who raises feeder pigs, seed stock, or hogs sold orslaughtered for sale and the assessments shall be remitted to theBoard.

The Board commissioned a contractor to perform onsite reviews atmarkets and other pork checkoff collection sites each year. Thereviewer arranged visits to several sites within a particular area.Due to the lack of available documentation, we could not establishthe objective(s) of these reviews. We reviewed the Board’sdocumentation for past reviews and found the reviewer did not recordthe methodology used to accomplish the reviews or disclose the scopeand results of any tests performed. However, one apparent objectivewas to determine if selected markets complied with the checkoffcollection requirements.

The Board required the reviewer to prepare written reports for eachsite visited. The reports showed the reviewer recorded only a shortdescription of the market visited and a statement that the marketcomplied. The records also did not include critical data about thereviews, such as criteria used to select the sites visited orcollection date(s) tested.

In 1997, the reviewer planned 2 trips to review a total of 20collection sites. However, the reviewer did not visit all the sitesselected for review. We could not determine the number of sites thereviewer actually visited due to the lack of documentation. Duringone trip, the reviewer traveled to Washington and Oregon and visitedonly 6 of the 11 selected sites. The reasons documented by thereviewer for not visiting the sites included "too far to drive" and"time constraints." In one case, a producer "stood up" the reviewerand successfully avoided review. Also, the reviewer did not alwaysdocument whether or not the visited sites complied with the Act. Wenoted the reviewer recorded compliance conclusions for only twosites reviewed in 1997.

The Board’s Executive Vice President stated the Board also relied onstatistical data from the Agricultural Research Service and the


Grain Inspection, Packers and Stockyard Administration, to estimatethe effectiveness of the Board’s collection activities. TheExecutive Vice President said the data indicated actual collectionstotaled over 95 percent of the statistical estimates provided bythese agencies. The Board did not maintain a record of thesestatistical reviews or documentation of the results.

The contract reviewer retired in 1997. The Executive Vice Presidentused the reviewer’s departure as an opportunity to develop betterdefined written procedures for the compliance reviews and to arrangetraining for a replacement contractor. At the time of ourevaluation, the Board had drafted new written procedures, replacedthe reviewer, and provided training to the new reviewer.


Provide sufficient oversight to ensurethe Board’s written procedures for compliance reviews at checkoffcollection sites include appropriate compliance tests and that theBoard effectively implements the procedures. The Board’s proceduresshould state clear objectives for the reviews, provide guidance forsite selections, and establish uniform and effective compliancetests, as well as documentation and reporting requirements for eachreview conducted.

AMS Response

On January 12, 1999, the Board submitted a compliance manual onassessment collections to AMS for approval. AMS is presentlyreviewing the manual and will ensure that it establishes detailedand uniform procedures for conducting audits of assessmentcollections for all classes of swine and that it addresses allpoints cited in Recommendation No. 5a. In addition, the Board willbe required to provide AMS advance notice of scheduled reviews tofacilitate potential accompaniment by agency personnel. AMS plansto complete the review and approval process by June 1, 1999, and theBoard must implement the new procedures by September 1, 1999.

OIG Position



Election practices for Board delegates

II. NATIONAL PORK ELECTIONS SHOULD BE MORE INCLUSIVE

FINDING NO. 6

RESTRICTED VOTINGOPPORTUNITIES INHIBIT

PARTICIPATION

inhibited participation by pork producerswho contributed checkoff assessments.State pork producer associations limitedthe number and location of sitesavailable for producers to participateand did not permit mail-in ballots. Theassociations also did not ensure electionparticipation was limited to bonafidepork producers. This occurred becausethe Board did not establish inclusivevoting procedures or monitor State

election practices. The Board did not direct State organizations torequire voters to preregister and/or provide evidence they producedpork and complied with checkoff requirements. As a result,participation in delegate elections is accomplished by less than 3percent of all producers and State and national elections for Boarddelegates are vulnerable to manipulation by ineligible producers.

Section 1617(b), of the Pork Promotion, Research, and ConsumerInformation Act states each State association shall providenominations through a process that provides complete and equalaccess to the nomination process to every producer who has paid allassessments due.

We visited one State association (Iowa) to review State votingpractices and interviewed association officials from four otherStates (Michigan, Minnesota, Nebraska, and North Carolina). Wefound all five associations limited voting to one day and to onelocation. All five State associations also permitted voters toself-certify their eligibility to vote without evidence of residencyor pork production. The State associations estimated the averagenumber of voters ranged from 25 to 100 participants. The number ofvoters in each States’ most recent delegate elections (1998), rangedfrom 25 to 77 producers. For these years, 1997 and 1998, the numberof voters represented less than 1 percent and less than 3 percent,respectively, of eligible producer in these States (See table onpage no. 25 for details).

As an example, the North Carolina association held an election onAugust 4, 1998, for 1999 delegates. The State’s Department ofEnvironment and Natural Resources estimated there were about 2,500pork producers in the State, of which a State official estimatedonly about 1 percent participated in the 1998 delegate election.The election was held at a motel in Raleigh, North Carolina. OneState association official stated that, generally, the association’sboard of directors were the only voters. North Carolina permitted


mail-in ballots for the State association’s own board of directorelections, but not for Board delegate elections.

In another example, the Iowa association held their delegateelection on July 15, 1998. Any Iowa producer was free to eitherparticipate or not participate. To participate, producers musttravel to a hotel located near the association’s offices. The Stateassociation did not permit mail-in ballots. Only 77 of an estimated18,000 - 20,000 pork producers (less than one-half of 1 percent)participated in the election in this State.

The following table illustrates our finding:

Estimated No. No. ofState of Producers Voters Ratio

Michigan 2,200 50-60* .0270Minnesota 10,000 54 .0054Nebraska 7,000 26 .0037North Carolina 2,534 25 .0099Iowa 19,000 77 .0041

* State organization estimate, actual number not available.

We believe these voting practices inhibited participation bybonafide pork producers. It is not reasonable to expect producersto drive to one city in a State to participate in an electionbecause it does not provide "equal access" to rural producerslocated in all corners of the State. Potential alternative votingsites may include USDA’s Farm Service Agency county offices andlocal pork producer associations. It is also inappropriate topermit participation in the elections by potential nonresidentand/or nonproducing voters without some form of verification ofeligibility. In order to comply with the Act, the Board’s electionpractices should facilitate full participation by eligibleproducers, rather than limit access by restricting the location andtiming of elections. Similarly, State associations and the Boardhave a duty to ensure that only eligible producers participate indelegate elections.


Direct the Board to develop and implementvoting policies and procedures which ensure (1) Board delegate andsimilar elections provide complete and equal access to everyproducer who paid all assessments due and (2) only eligibleproducers participate in delegate and similar elections.


AMS Response

AMS will direct the Board to develop written procedures for Stateassociation to conduct statewide elections of nominees forappointment by the Secretary of Agriculture to the National PorkProducers Delegate Body. The revised voting procedures are to besubmitted to AMS for approval by September 1, 1999, and implementedfor elections occurring after January 1, 2000.

OIG Position



Require the Board to establish effectiveoversight review procedures to ensure State associations comply withthe Board’s election policies and procedures.

AMS Response

AMS will direct the Board to require each State association tocertify, at the time of submission of names for nominees to theBoard, that they comply fully with the revised and AMS approvedvoting procedures. AMS will also require the Board to include areview and certification of State association election procedures toensure compliance with the revised procedures. The revisedprocedures are to be submitted to AMS for approval by September 1,1999, and implemented by January 1, 2000.

OIG Position



EXHIBIT A - PROJECT ACCOUNT CLASSIFICATIONS

We examined records for six NPPC checkoff project accounts and found eachaccount included transactions from as many as six different subprojects.This exhibit presents summaries of the six selected project accounts and, inour opinion, shows transactions for the subprojects should be separatelyaccounted for rather than mixed in one account (see Finding No. 3).

Account Classification Which IncludedPayments to Consultant A

Program/Project Title: Networking Year: 1997

No. of TotalSubproject Title Transactions Amount

Networking and Value Added 14 $44,025Educational Meetings 7 16,887State Networking Contacts 9 30,345Networking Committee Meetings 5 701State Networking Contact Meeting 22 17,988Unsure/Could Not Recall 1 154

TOTAL 58 $110,100

Program/Project Title: Networking Year: 1998


Value-Added Pilot Projects 14 $9,497Networking 1 2,000Mail Service 1 4

TOTAL 16 $11,501



Account Classification Which IncludedPayments to Consultant B

Program/Project Title: Retail Meal Solutions Year: 1997


Research 11 $125,869New Product Creative 5 76,569M.A.P.S. Support New Product Rollout 4 136,591OP/Supplies 8 8,894Reclassified Prepaid expenses 1 4,550

TOTAL 29 $352,473

Program/Project Title: New Products Research Year: 1997


Visionary Design Research 21 $64,593New Product Research (consumer and

technical/meat science) 13 82,295New Product Research - consumer 4 39,904New Product Research - technical

and meat science 7 55,275Conference Registration and Fees 6 6,605Demand Enhancement Committee 49 1,621Intern Help 1 68Bozell Monthly Fee 12 300,000Out of Pocket Expenses/Supplies 52 73,408Storage Fee 1 25Beginning Year Invoice Credits 2 <9,090>Office Furniture 1 1,105Replenish Petty Cash Expense 4 186Unknown/Uncertain Transactions 4 90

TOTAL 177 $616,085



Consultant B (continued)

Program/Project Title: New Products Year: 1998


Technical Research and Development 10 $8,966Deep Basted Research 4 19,346New Product Optimization Research 3 1,208Fresh Ham Product Research 4 17,486New Product - Qualitative Research 3 25,527Conference/Meeting 1 225New Products Committee 1 29Shipping 1 212Operating Supplies 4 599Replenish Account 1 1Reclassified Transaction 1 <16>Unknown Transactions 2 <1,116>

TOTAL 35 $72,467

Account Classification Which IncludedPayments to Subcontractor C

Program/Project Title: Genetic Evaluation & Research Year: 1996


Maternal Line Program 18 $85,971Lean Growth Modeling 207 167,649Terminal Line Program 7 447Genetics Committee Meeting 103 33,473Other-Book Purchase & Program Support 2 480Unsure/Could Not Recall 18 42,499

TOTAL 355 $330,519


EXHIBIT B - NATIONAL PORK BOARD COMMENTSON OUR PRELIMINARY FINDINGS


EXHIBIT C - AMS RESPONSE TO THE DRAFT REPORT


agricultural marketing service controls over pork … · this evaluation was scheduled as part of...

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